Doosan Power Systems India Private Limited, Haryana V. ITO, Corporate Ward - 1(4), CHENNAI

ITTPA 2/CHNY/2020

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4966 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 16-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2015-2016
• Appeal Filed On: 01-01-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Earning of tax free income; Working capital adjustments; Commercial expediency; TDS; Set aside
• Section: 43B; 143(3); 92D; 14A; 274; 139(1); 13

Judgement Text

आयकर अपीलीय अिधकरण, ‘डी’ ᭠यायपीठ, चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI Įी जी. मंज ु नाथ, लेखा सदèय एवं Įी अǓनकेश बनजȸ, ÛयाǓयक सदèय के सम¢ BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER AND SHRI. ANIKESH BANERJEE, JUDICIAL MEMBER आयकर अपील सं./IT(TP)A No.: 02/Chny/2020 िनधाᭅरण वषᭅ / Assessment Year: 2015-16 Doosan Power Systems India Private Limited, 16 th Floor, DLF Square, Jacaranda Marg, Near NH-8, DLF Phase-II, Gurgaon – 122 002, Haryana. [PAN: AABCB 5946J] v. The Income Tax Officer, Corporate Ward 1(4), Chennai – 600 034. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Shri. Vikram Vijayarghavan, Advocate ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Dr. S. Palani Kumar, CIT स ु नवाई कȧ तारȣख/Date of Hearing : 09.03.2022 घोषणा कȧ तारȣख/Date of Pronouncement : 17.03.2022 आदेश /O R D E R PER ANIKESH BANERJEE, JUDICIAL MEMBER: 1. The instant appeal was filed by the assessee that is directed against final assessment order passed by the Assessing Officer (in brevity AO) U/s 143(3) rws144C (13) of the Income Tax Act (brevity the Act)in pursuant to the directions of Dispute Resolution Panel-2 (in brevity DRP), :-2-: IT(TP)A. No: 02/Chny/2020 Bengaluru, dated 18/09/2019 issued U/s 144C(5) of the Act pertains to Assessment year 2015-16. 2. Assessee agitated the following grounds of Appeal which are as follows:- “ 1. General grounds 1.1. The order passed by the Learned (`Ld.') Income Tax Officer (`AO') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel (`DRP') under section 143(3) r.w.s.144C(13) of the IncomeTax Act,196] (`the Act'), is bad in law and on facts. 1.2. On the facts and in the circumstances of the case and in law, the Ld. Transfer Pricing Officer (`TPO')/ the Ld. AO under the directions issued by the Hon'ble DRP, erred in making an addition to the Appellant's total income of Rs. 496,110,616 and computing the total income of the Appellant for Assessment Year ("AY") 2015-16 at Rs. 1,089,813,036 as against the returned income of Rs. 593,702,420. 1.3. On the facts and in law, the Ld. AO, led. TPO and the Hon'ble DRP erred in modifying the economic analysis and filters applied by the Appellant in the Transfer Pricing ("TP") documentation maintained under section 92D of the Act read with Rule 10D of the Income-Tax Rules, 1962 (`the Rules') and applying new filters for the purpose of identification of companies comparable to the Appellant. In doing so, the Ld. AO, Ld. TPO and the Hon'ble DRP failed to discharge the statutory onus to establish that any of the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have not been satisfied. Transfer Pricing adjustment relating to Purchase of project material, receipt of technical services, receipt of communication services, receipt of IT services, receipt of Legal and Professional services and salaries and other costs of seconded employee -Rs. 416.340.034 2. Economic Adjustments 2.1 0n facts and in law, the Ld. AO, Ld. TPO and the Hon'ble DRP erred in not allowing appropriate adjustments under Rule 10B(1)(e)(iii) and Rule 10B(3) of the Rules to account for differences in working capital of the comparables vis-a-vis the Appellant, even though the same was allowed in the previous assessment year(s). 3. Erroneous rejection and selection of comparable companies 3.1 0n facts and in law, the Ld. AO, Ld. TPO and the Hon'ble DRP, in contravention of the section 92C(3) of the Act read with Rule 108(2) of the Rules, erred in rejecting the comparable companies selected by the Appellant in the TP documentation prepared and maintained in compliance with section 92D of the Act read with Rule 10D of the Rules 3.2 0n facts and in law, the Ld. AO, Ld. TPO and the Hon'ble DRP, erred in violating the provisions of Rule log(2) by introducing new companies without considering the differences in the functions performed, assets employed and risks assumed by such companies vis-a-vis the Appellant, thereby resorting to unsubstantiated selection of comparables. 4. Incorrect computation of margin of comparables and adjustment amount :-3-: IT(TP)A. No: 02/Chny/2020 4.1 Without prejudice to the above grounds, the Ld. AO/ Ld. TPO erred in incorrectly computing the operating profit margin of the companies by only considering information available in publically available database(s) without appreciating the fact that the annual reports of the companies were available at the time of assessment. 4.2 0n facts and in law, Ld. AO, Ld. TPO and the Hon'ble DRP, while arriving at the arm's length price of the above international transactions and computing the adjustment amount, erred in not reducing the operating cost by the total amount of the Royalty paid (Rs353,288,531) as the same was benchmarked separately. Transfer Pricing adjustment relating to payment of Technical Rovalty-Rs.74.669816 5. On the facts and in law, the Ld. AO, Ld. TPO and the Hon'b1e DRP erred on facts and in law in determining the arm's length price of international transaction pertaining to payment of royalty at Rs. 278,618,715 as against Rs. 353,288,531 as determined by the Appellant. 6. On the facts and in law, the Ld. AO, Ld. TPO and the Hon'ble DRP violated the provisions of Rule log(2) of the Rules by rejecting all the comparable agreements selected by the Appellant in the TP documentation for the purpose of benchmarking the transaction of payment of Royalty without providing any cogent reason for the same. 7. Without prejudice, on the facts and in law, the Ld. AO, ld TPO and the Hon'ble DRP violated the provisions of Rule 108(2) of the Rules by arbitrarily introducing two additional companies/agreements which are functionally dissimilar to the Appellant for the purpose of determining the arm's length price. Corporate Tax Adjustments 8. The Ld. AO and Hon'ble DRP erred on the facts and in law in disallowing employee's contribution to Provident Fund ("PF") and employee's contribution to Employee State lnsurance ("ESI") amounting to INR 5,100,766. 9. The Ld. AO and Hon'ble DRP erred in disallowing INR 5,100,766 under section 36(1)(va) of the Income-tax Act ("the Act") on account of delayed remittance of the employee's contribution to PF and ESI. 10. The Ld. AO and Hon'ble DRP failed to appreciate that the Appellant had made the requisite remittance before the due date of filing of Return of Income ("RoI") for AY 2015-16 i.e„ 30 November 2015. 11. The Ld. AO failed to appreciate the existing jurisprudence which had held that employee's contribution to PF and ESI are also covered under section 438 of the Act and that the delayed employees contribution to PF and ESI be allowed as deduction in the computation of taxable income for the year under consideration if they are paid before the due date of filing the RoI. 12. Further, the Ld. AO and Hon'ble DRP failed to appreciate the rulings of the Hon'ble Supreme Court (`SC') in the case of CIT v. Alom Extrusion Limited [2009] 319 ITR 306, CIT v. Vinay Cement Ltd. [2007] 213 CTR 268 (SC) and other judgments wherein it was held that employee's contribution to PF/ESI can be claimed as an allowable deduction under section 36(1)(va) read with section 438oftheAct if the said payments are made on or before the due date for filing the RoI for the subject AY. 13. The Ld. AO and Hon'ble DRP erred on facts and in law by not giving the credit for Tax Deducted at Source ("TDS"). :-4-: IT(TP)A. No: 02/Chny/2020 14.The Ld. AO and Hon'ble DRP erred in not giving credit for TDS amount in to INR1,500,480. Consequential Grounds – 15. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 2348 and 234C of the Act. 16. The Ld. AO erred in initiating penalty proceedings under section 271(1)(c ) of the Act for furnishing inaccurate particulars of income. 17.The Ld.AO erred in initiating penalty proceedings under section 274 r.w.s 271G and section 271M of the Act. The above ‘Grounds Of Appeal' are independent and without prejudice to eachother. The Appellant craves leave to suuplement, withdraw, amend, add and/or otherwise alter or modify, any or all, grounds of the appeal stated hereinabove and to submit such statements, documents and papers as may be considered necessary either before or during the appeal hearing. “ 3. The case has been selected for scrutiny and during the course of assessment proceedings, a reference was made u/s. 92CA(1) of the Act to Transfer Pricing Officer (in brevity TPO) to determine ALP of international transactions of the assessee with its AEs. During transfer pricing assessment proceedings, the TPO made downward adjustment of Rs. 49,37,12,961/- towards the value of International Transaction & another downward adjustment amount of Rs 7,46,69,816/- towards payment of Technical Royalty. Based on the TPO order dated 31/10/2018, Assessing Officer has passed draft assessment order u/s. 143(3) r.w.s 92CA of the Act on 28/12/2018 and proposed following transfer pricing adjustments. The Assessing Officer has also proposed additions towards corporate tax issues like disallowance u/s. 36(1)(va) of the Act amount of Rs.51,00,766/-. The details of adjustments proposed by the Assessing Officer in draft assessment order are as follows:- TP Adjustment:- Transfer pricing adjustment Rs 59,37,02,420/- :-5-: IT(TP)A. No: 02/Chny/2020 Corporate Adjustment:- Disallowance U/s 36(1)(va) Rs 51,00,766/- 4. The assessee has filed its return of income for assessment year 2015- 16 on 30.11.2015 admitting total income of Rs. 59,41,23,930/-. The assessee has filed auditor’s report in form 3CEB related to international transactions, as per which during the year under consideration, it has entered into following international transactions with its AEs:- Sl. No Description of Transaction Name of the Associated Enterprises Quantum of International Transaction (Rs. ) Method adopted by the assessee 1 Purchase of Software Licenses and other related services capitalized in books of accounts Doosan Corporation South Korea, Korea 50,71,949 Other Method 2 Payment of Royalty on Sales Doosan Heavy Industries and Constructions Co. Limited, Korea 35,32,88,531 3 Payment of Royalty for right to use Brand Trade mark Doosan Heavy Industries and Constructions Co. Limited, Korea 6,48,73,762 4 Engineering services rendered for overseas project Doosan Heavy Industries and Constructions Co. Limited, Korea 2,72,14,621 5 Doosan Engineering & Services LLC USA, USA 1,96,16,874 6 Doosan Lentjes GmbH, Goldbach Strabe 20,59,856 7 Doosan Babcock Limited Formerly known as Doosan Power Systems Ltd., United Kingdom 1,06,42,418 8 Receipt of IT services Doosan Corporation South Korea, Korea 5,36,35,246 9 Receipt of Legal and Professional Services Doosan Corporation South Korea, Korea 13,88,257 10 Receipt of Communication Services Doosan Corporation South Korea, Korea 1,37,86,243 11 Receipt of Technical Services Doosan Heavy Industries and Constructions Co. Limited, Korea 31,91,03,633 12 Technical Assistance in Doosan Babcock Limited Formerly 15,96,178 :-6-: IT(TP)A. No: 02/Chny/2020 relation to TATA Steel Project known as Doosan Power Systems Ltd., United Kingdom 13 Parent Corporate Guarantee Fee Doosan Heavy Industries and Constructions Co. Limited, Korea 3,35,23,340 14 Project Material Kudgi Doosan Heavy Industries and Constructions Co. Limited, Korea 3,39,66,37,414 Other Method 15 Project Material Lara Doosan Heavy Industries and Constructions Co. Limited, Korea 5,29,56,26,063 16 Project Material Raipur Doosan Heavy Industries and Constructions Co. Limited, Korea 66,12,51,258 17 Project Material Kudgi Doosan Heavy Industries Vietnam Co. Limited, Vietnam 4,46,18,652 18 Project Material Lara Doosan Heavy Industries Vietnam Co. Limited, Vietnam 207,04,80,359 19 Salaries and other costs of seconded employee Doosan Babcock Limited Formerly known as Doosan Power Systems Ltd., United Kingdom 1,78,92,834 20 Reimbursement of Bank Guarantee Charges Doosan Heavy Industries and Constructions Co. Limited, Korea 8,16,88,043 21 Recovery of travelling expenses Doosan Babcock Limited Formerly known as Doosan Power Systems Ltd., United Kingdom 1,14,063 22 Recovery of travelling expenses Doosan Engineering & Services LLC, USA, USA 1,44,55,637 Total 1248,85,65,231 5. The brief fact of the case is that assessee, M/s. Doosan Power Systems India Private Limited is engaged in the business of designing, building, installation and maintaining engineering plants with specialization in thermal and coal power plants. The assessee also renders engineering services to its associate enterprises. The assessee company is a subsidiary of Doosan Heavy Industries & Construction Co. Ltd (DHIC). The details of shares held by shareholders in the company as per the audited balance sheet as on 31.03.2015 is as follows: Name of Shareholder Number of Shares held Percentage :-7-: IT(TP)A. No: 02/Chny/2020 Doosan Heavy Industries and Constructions Co. Limited, Korea, the holding company 3,39,08,401 99.45% Doosan Power Systems Overseas Investment Ltd., UK 1,87,922 0.55% Total 3,40,96,323 100.00% 5.1 The assessee company has carried out the projects with NTPC and GMR at Kudgi, Lara and Raipur & other plaaces. During the Transfer Pricing proceedings, the assessee has provided segmental P&L account for each of these projects and arrived at NPM of 2.59% for Kudgi project and 7.93% for Lara project. Apart from purchase of project material (Kudgi project – Rs. 339,66,3,414/- and Lara project Rs. 736,61,06,422/-). The assessee company has entered into transactions with its Associate Enterprise (AE) on receipt of technical services for a total sum of Rs. 31,91,03,633/- which it has allocated to Kudgi and Lara projects and benchmarked the same under NPM. The assessee adopted ‘Other method’ as the most appropriate method (MAM) to benchmark the transaction under each of these projects. 5.2 During proceedings the TPO in the TP study of the assessee, proceeded to determine the arm’s length price in relation to the international transaction in accordance with section 92C(1) and 92C(2) of the Act on the basis of such material or information or documents available with him. Accordingly, the other method adopted by the assessee was rejected and the TPO accepted the method TNMM during the TPO study. The DRP also accepted the TPO’s view. Accordingly the order was passed by the TPO and finally order was passed by the ld. AO :-8-: IT(TP)A. No: 02/Chny/2020 taking the same view of the TPO. In the independent research conducted by the TPO, the following details are submitted in project segment in its order: Particulars Amount (Rs.) Operating Income 33118042461 Operating Expenses 31866939122 Operating Profit 1251103339 OP/OI 3.8% 5.3 During benchmark the TPO made an independent study and the TPO excluded the Engineers India Ltd and included the Larsen and Toubro Ltd which are under grievance of the assessee. 5.4. In case of payment towards technical royalty, the assessee paid the royalty @ 3.17% at the net selling price of the licensed products. The assessee company has adopted “Other method” as “MAM” and identified 4 comparable agreements based on search conducted in Royalty stat database. On verification of the comparable agreement it was found that the entities are into construction of building, real estate, disaster management, etc. Accordingly, the details were accumulated by the TPO in its order. The TPO mostly focused in two words specifically “energy & Boiler” during its filter related to the agreement of the assessee with it’s AE. As per the TPO two words are missing in the assessee’s agreement. Accordingly the filter was made for search. The DRP inclined with view of the TPO & rejected the ground of assessee in their order. But, the assessee clarified the issue in such a way that the boiler or energy should :-9-: IT(TP)A. No: 02/Chny/2020 not be based on the rejecting search and the TPO arbitrarily rejected the search. 6. The assessee has filed objections against draft assessment order passed by Assessing Officer before DRP-2, Bengaluru, and challenged various adjustments proposed by the Assessing Officer, but could not succeed. The learned DRP has upheld adjustments proposed by the Assessing Officer towards downward adjustments on value of international transaction & payment of royalty. The learned Assessing Officer has passed final assessment order on 21/11/2019 in pursuant to directions of DRP and made additions proposed by TPO towards international transactions & payment of royalty. The assessee carried matter in appeal before the ITAT, Chennai Bench for adjudication. The assessee filed paper books in Volume I & II before the Bench which are kept in record. 7. Being aggrieved by final assessment order, assessee filed appeal before us. 8. Ground No.1 of assessee appeal is general in nature and does not require specific adjudication and hence, same is rejected. 9. Ground no 2 is related to working capital adjustment:- 9.1 The Observation of DRP is as follows:- “6.2.5 Before this Panel also no additional material/evidence is brought on record to substantiate this claim. Working capital adjustment as a general rule cannot be granted. It has to be demonstrated in the facts of the case that because of favourable working capital position or otherwise of the same, the profit of the comparables in the open market were impacted. The submission of the assessee has been considered. No such :-10-: IT(TP)A. No: 02/Chny/2020 factual details have been provided by the assessee relating to the comparables to make out a case for consideration in favour of its contention, The TPO after detailed discussion in para 12 of his order has rejected the request of the assessee. As such, the contention for granting working capital adjustment cannot be accepted. Ground rejected.” 9.2 In this issue the aasessee has covered by the orders of the coordinate benches in its own cases:- (i) M/s. Doosan Power Systems India in ITA No. 581/Mds/2016 dated 14.12.2016: “11. In so far as working capital adjustment sought by the assessee was concerned, ld. DRP had not considered the present position of law as laid by a plethora of decisions of this Tribunal which mandated such adjustment as a necessary one while computing profit level indicator. As for interest on delayed receivables, ld. DRP had not dealt with the objections of the assessee against comparing the receivables with pure loans, without considering the commercial expediency factor. On the claim of depreciation of goodwill, ld. DRP had not given any finding why the claim made for the first time before it could not be considered. As for the remittances to employer contribution to Provident Fund, ld. Departmental Representative had not considered the effect of Section 43B on such claim, where remittances of the deducted amount were made before the due date of filing the return. Coming to the disallowance made u/sec. 14A of the Act, the ld. DRP had notadjudicated as to how such disallowance could be made where the claim of the assessee was that it had not earned any exempt income.” (ii) IT(TP)A No.83/Chny/2018 , Assessment Year: 2014-15 “7. The Ld. AR for the assessee referring to various grounds of appeal filed before the Tribunal submitted that although the assessee has challenged TP adjustment, in light of comparables selected by the AO to determine the margin earned by comparables and further to compare the same with margin earned by the assessee, but he is going to restrict his arguments only in respect of entity level adjustment proposed by the Ld. TPO and affirmed by the ld. DRP because the issue of adjustment towards international transactions alone is almost settled by the decisions of Hon'ble Supreme Court and other Hon'ble High Courts, where it was categorically held that TP adjustments needs to be made at transactions level with reference to international transactions of the assessee with its AE but not at entity level. The Ld. AR for the assessee further submitted that although :-11-: IT(TP)A. No: 02/Chny/2020 the assessee has challenged comparables selected by the AO, but keeping in view of the fact that there is no much variation in the margins of the assessee when compare to margins at comparables selected by the AO, he rest his arguments to the extent of adjustment made at entity level. He further submitted that as regards working capital adjustment although the issue is squarely covered in favour of the assessee by the decision of ITAT, Chennai in assessee’s own case, the Ld. TPO as well as DRP has erred in not providing working capital adjustments. Therefore, a suitable direction may be given to the Ld. TPO to re- compute working capital adjustments in accordance with the rules provided therein by following the decision of assessee’s own case for earlier year. 8. On the other hand, the Ld. DR strongly supporting the order of Ld. TPO as well as Ld. DRP submitted that the Ld. TPO brought out clear facts in light of decision of Hon'ble ITAT, Chennai in the case of Caterpillar India Pvt. Ltd. that entity level adjustment can be made even though the issue is settled by the Hon'ble Bombay High Court in favour of the assessee in the case of M/s. Firestone International Pvt. Ltd. Further, the SLP filed by the Department against the order by Hon'ble Bombay High Court has been admitted by the Hon'ble Supreme Court. Therefore, to keep the issue alive, the Ld. TPO has proposed entity level adjustment and hence, there is no error in the findings recorded by the Ld. DRP to affirm the findings of Ld. TPO/AO and their order should be upheld. 9. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below along with case laws cited by the ld. AR for the assessee. We find that although the assessee has challenged TP adjustment made by the Ld. TPO in light of FAR analysis and comparables, but the Ld. AR for the assessee has restricted his arguments in respect of entity level adjustments made by the Ld. TPO. Therefore, we rest our findings to the issue of entity level adjustment made by the Ld. TPO in light of certain judicial precedence cited by the Ld. AR for the assessee. Admittedly, it is a well settled principle of law by the decision of Hon'ble Supreme Court in the case of CIT vs. M/s. Firestone International Pvt. Ltd. in SLP No.41327/2015, where the Hon'ble Supreme Court has dismissed the SLP filed by the Department and affirmed to the findings of :-12-: IT(TP)A. No: 02/Chny/2020 Hon'ble Bombay High Court, where the Hon'ble High Court held that TP adjustments cannot be made beyond the transactions of the assessee with its associated enterprises. The Hon'ble Bombay High Court in yet another case of CIT vs. Tara Jewels Exports Pvt. Ltd. (supra) had also considered identical issue and held that TP adjustments cannot be made at entity level. The ITAT, Chennai in the case of Prodapt Solutions Pvt. Ltd. vs. DCIT in ITA No.566/Chny/2017 has considered an identical issue and held that transfer pricing adjustment has to be made only in respect of transactions of the assessee being a tested party, with associated enterprises after comparing the transactions made by similarly placed company in uncontrolled transactions with non associated enterprises. The sum and substance of the ratios laid down by Hon'ble Supreme Court and Hon'ble High Courts are that TP adjustment can be made only in respect of transactions of the assessee with its associated enterprises, but not to a third party transactions at entity level. Although the Ld. TPO as well as Ld. DRP have accepted the fact that the issue has been decided in favour of the assessee by various Hon'ble High Courts, but because the SLP filed by the Department has been admitted by the Hon'ble Supreme Court they have proposed adjustment at entity level to keep the issue alive. But fact remains that the SLP filed by the Department has been dismissed by the Hon'ble Supreme Court vide its order dated 31.01.2018 and hence, the issue of TP adjustment at entity level had attain finality dismissal of SLP filed by the Department by the Hon'ble Supreme Court. Therefore, we are of the considered view that the Ld. TPO as well as DRP has erred in making TP adjustment at entity level. Hence, we direct the Ld. TPO to restrict TP adjustment in respect of international transactions of the assessee with its associated enterprises. The other issue raised by the assessee including comparables selected by the AO and average margins of comparables is not pressed by the Ld. AR for the assessee and hence, there is no requirement of adjudicating the issue at this level. 10. As regards working capital adjustment, it was the claim of the Ld. AR for the assessee that the ITAT, Chennai Bench in assessee’s own case for the AY 2011-12 has considered an identical issue and held that working capital adjustment is :-13-: IT(TP)A. No: 02/Chny/2020 necessary while computing profit level indicator after analyzing the margins of comparables. Therefore, we are of the considered view that the Ld. TPO needs to compute working capital adjustment having regard to the margins of the comparables after considering the working capital levels. But, fact remains that the details with regard to working capital adjustment of comparables is not placed before us. Therefore, we are of the considered view that the matter needs to go back to the file of Ld. TPO to re-consider the working capital adjustment in light of the findings of the Tribunal in assessee’s own case for AY 2011-12. Hence, this issue is set aside to the file of the Ld. TPO.” 9.1. The Ld DR vehemently argued & relied on the orders of TPO & DRP. 9.2. Decision:- We heard both the parties. The coordinate benches already granted working capital adjustment to DPSI, assessee. We will no more interfere in the issue. This ground is setting aside for further adjudication to the Ld AO. 10. Ground no-3 Erroneous rejection and selection of comparable companies:- 10.1 During the comparable study made by the ld. TPO and its independent search was made by the Ld. TPO itself. The assessee only agitated two issues that during comparable study the TPO excluded M/s Engineers India Limited & included M/s Larsen and Toubro Ltd in its TP Study. As per the order of the TPO, Engineers India Limited is a functionally dissimilar and the company provided engineering consultancy and EPC services on the oil and gas and petrochemical industries. So, the particular company Engineers India Limited should be rejected from the list. On the other hand, the TPO had included the Larson and Turbo Limited (in short L&T) in its TP study and data was compared accordingly. :-14-: IT(TP)A. No: 02/Chny/2020 The three weighted average mean is 7.82 as per the Ld. TPO by the TNMM method. 10.2 The Ld. TPO had made an order and rejected the assessee’s claim in the following observations: Name of the Comparable Company TPO contentions Assessee’s contentions DRP directions Engineers India Ltd Functionally dissimilar (Company provides engineering consultancy and EPC services on the oil & gas and petrochemical industries) 1. Functionally comparable 2. Satisfying the filters applied by the TPO 3. Considered as a comparable in earlier years as well. This company is a public sector company of Govt. of India and declared “Navratna company”. If primarily focuses on consultancy (948 cr. Revenue) and engineering (765 cr revenue). Further its predominant focus is o n petrochemical industry. Hence it is not a proper comparable. Name of the Company Assessee’s objections DRP’s directions Larsen and Tourbo Ltd a. L&T is a giant compared to the assessee; - Turnover is 16 times DPSI’s turnover - Fixed asset base more than 15 times DPSI’s fixed asset base b. Functionally dissimilar – engaged in electrical and automation, IT consulting, ship building c. Segmental company taken at entity level – power segment should be considered The assessee objected that the company is huge with 16 times the DPSI turnover. Further it is contended that it has diverse operations in the fields of electrical, automation, nuclear plants, IT consulting, mellalurgy, ship building etc. Alternatively, assessee pleaded that only that power segment of the company should be considered. After careful consideration, the size of the company is huge compared to assessee and also it is into highly diversified activities. However, if the power segment alone is considered, the size of the company would be very much comparable. Hence TPO is directd to adopt the power segment results of L&T for comparison. Directed accordingly. :-15-: IT(TP)A. No: 02/Chny/2020 10.3 As per the counsel, the assessee filed written objections before DRP related the TP study of TPO. As per the assessee, the related to project segment Kudgi, Lara & Raipur and other segments. As per TP documentation after comparable of 12 studies the Margin of Comparable Companies (MCC) 7.82%. The TPO rejected the 11 comparable and introduced 4 additional comparables the weighted average mean is 7.82%. On the other hand, the margin of the assessee (MAC) computed by the TPO 3.8%. As per the TP documentation, the assessee accepted the “Other method”. In considering the study of the TPO and the order of the DRP, the assessee submitted that the Government Company cannot be rejected and mentioned the judgment of the Hon’ble Madras High Court in the case of CIT vs Same Deutz – Fahr India Private Ltd, Tax Case Appeal no. 567 of 2017 order dated 05.12.2017. As per this order of Hon’able Madras High Court in point 18, “there is, however, no provisions of law which makes any distinction between a Government owned company and a company under private management for the purpose of transfer pricing audit and/or fixation of Alp. There is no reason why a government owned company cannot treated as a comparable. It is reiterated that the learned Tribunal found, on facts, that the functionality of M/s. HMT Limited and the assessee were the same.” The counsel of the assessee also pointed out that the Engineers India Ltd is Navratna Company and as per the Government of India publication dated 21.07.2014 all the data are available in online and the issues are functionally comparable. :-16-: IT(TP)A. No: 02/Chny/2020 On the other hand the DR argued considering the observation of the order of TPO. He mentioned that Government Concern should be excluded as they have different procedure of business. 10.4 Considering all the facts, the TPO was wrong to exclude the Engineers India Ltd so, the Engineers India Ltd is included in the TP study. 10.5 During TP study, the TPO had included M/s Larsen and Turbo Limited and the counsel of the assessee made objection that the turnover of L&T is 16 times higher than assessee and the fixed asset is more than 15 times comparable to DPSI’s fixed assets. The observations of the DRP was that there is a huge comparable data. The TP study can be done on relation to each and every transaction. So, the DRP accepted the observation of the TPO and rejected the assessee’s observation. 10.6 The Counsel of the assessee made his reliance for exclusion of M/s Larsen and Toubro Ltd on the following judgments related to huge difference of turnover in relation to the low turnover company DPSI. The judgments are as follows: (i) Agnity India Technologies vs ITO, ITA No. 3856/Del/2010 dated 04.11.2010 (ii) Deloitte Consulting India Pvt. Ltd in ITA No. 1082& 1084/Hyd/2010 (iii) Egain Communication (P) Ltd vs ITO [2008] 23 SOT 385 (Pune) :-17-: IT(TP)A. No: 02/Chny/2020 (iv) M/s. Trinity Advanced Software Labs (P) Ltd vs ACIT in iTA No. 1129/Hyd/2005 (v) DHL Express (India) Private Limited in ITA No. 7360/Mum/2010 for AY 2006-07 10.7 The Ld. DR vehemently argued. The DR took contrary view against the Counsel, As per his argument, the TPO study was made on the available records so there is no basis for rejecting the same. He relied on the order of the DRP, as per the DRP the TPO can adopt the power segment result of L&T. As per him, he could not recommend any revisionary measure so the observation of the TPO and DRP is absolutely correct. 10.8 We considered the arguments of both the parties. The TPO has included L&T Limited on the ground that said companies financials are similar to the assessee company. The assessee never disputed the fact that the functions performed by L&T Limited is not similar to functions performed by the assessee company, but requested to exclude L&T Limited only on the ground that its turnover is huge which is almost more than 16 times of turnover of the assessee. We find that the Ld. DRP in its order on page 7 after considering relevant submissions of the assessee has directed the TPO to consider the power segment functionally of L&T Limited and then compare with assessee’s transactions. In addition to this, we also direct the TPO to adopt turnover filter to determine whether the power segment of L&T Limited is fit into the turnover category to :-18-: IT(TP)A. No: 02/Chny/2020 compare the transactions of the assessee and then re-compute the TP adjustments. 11. Ground No. 4: Incorrect computation of margin of comparables and adjustment amount: 11.1 The TPO calculated ‘apart of profit margin’ in the following comparables. The assessee has also made a counter calculation. The comparison was made by the assessee and filed in its paper book page no 449 which is reproduced as under: Sl. No Name of comparable Weighted Average NPM as pr TPO order Weighted Average NPM as per Assessee 1 Tata Projects Ltd 3.845 3.82%* 2 Indure Pvt. Ltd 6.11% 4.13% 3 Abir Infrastructure Pvt Ltd 10.12% 9.35% 4 Larsen & Toubro Ltd 9.44% 8.82%** 5 Thermax Ltd 9.60% 9.19% Average 7.82% 7.06% * NPM for the EPC segment ** NPM for the Power Segment The matter was came before the DRP and the DRP reduced the margin from 7.19% to 6.95%. 11.2 Considering both the facts of observations, we herein restore the matter back to the TPO with a direction to calculate OP/OC margin by comparing the entities as mentioned above. The matter is setting aside to AO for further calculation. 12. Ground No. 5 to 7: Transfer Pricing adjustment relating to payment of Technical Royalty: :-19-: IT(TP)A. No: 02/Chny/2020 12.1 During examination, the search was conducted by the TPO. The following observations were made in its order relating to calculation of payment of Technical Royalty to AE, total sum of Rs. 353,288,531/-. The assessee paid Royalty @ 3.17% on net selling price of the license product to its AE and the assessee company has adopted “Other method’ as MAM and identified 4 comparable agreements based on search conducted in royalty database. The Ld. TPO has found some observations which are reproduced as under: “ 13. Comparable companies after the above filters as follows: Sl.No Comparable Company Rate – Net Sale (%) 1 Amanasu Energy Corp. 2.00% 2 PowerVerde, Inc. 3.00% Average 2.5% 14. ALP Calculation as below: Sl.No Description Amount in Rs. 1 Royalty @ 3.17% 35,32,88,531 2 Royalty @2.5% 27,86,18,715 Downward Adjustment 7,46,69,816 12.2 The assessee challenged the matter before the DRP and the DRP took the following observations: “ 7.1 Panel: The assessee contended that royalty should be excluded from the operating expenses while computing adjustment/margin of the assessee as royalty was separately benchmarked. This argument of the assessee has no basis. For computing the operating net profit margin of a FPC contractor/manufacturer, under TNMM require consideration of all the operating costs which include royalty also. Royalty expenditure claimed by the assessee is integral part of the cost of the assessee. Merely because :-20-: IT(TP)A. No: 02/Chny/2020 Royalty is separately benchmarked, it cannot be excluded from the cost. Accordingly, the contentions of the assessee are rejected. Ground rejected.” 12.3 As per the counsel of the assessee, both the authorities arbitrarily rejected the assessee’s claim. It is not to be accepted that mere omission of word “Boiler or Energy” should not be basis for rejecting the search. As per the counsel of the assessee in comparable search M/s Amanasu Energy Corporation is not at all a comparable search and the entity of M/s Power verde Inc does not relate to the financial year 2014-15 which has affects from the year 2015-2016. So, both the benchmarks is not to be accepted by the assessee. The assessee produced the following calculations in its paper book page 324: Assessee’s Approach – As per TP documentation Most Appropriate Method Other Method Royalty rate paid by DPSI 3.17% Arm’s Length Margin 5.31% TPO’s Approach TPO rejected 4 agreements and introduced 2 additional agreements Arm’s Length margin 2.50% Adjustment Amount Rs. 74,66,9816 12.4 The DR vehemently argued on this issue and relied on the order of the TPO and the DRP. 12.5 We heard both the parties. The AO has benchmarked royalty payment to the AE by rejecting TNMM adopted by the assessee to benchmark its transactions with AO on entity level and has selected CUP method. The TPO has selected two comparables with the average rate of :-21-: IT(TP)A. No: 02/Chny/2020 2.5% royalty under similar circumstances and then compared with royalty paid by the assessee @ 3.17% and has made adjustments of Rs. 7,46,69,866/-. It was an argument of the ld. Counsel of the assessee that once TNMM has been accepted as most appropriate method, then there is no scope for cherry picking individual transactions and applied different method. In this regard, he relied upon the decision of ITAT in the case of M/s. Durr India Private Ltd in ITA No. 754/2014. We have considered the arguments of the Ld. AR of the assessee. In the light of the reasons given by the AO to separately benchmark royalty payment by adopting CUP method, we find that even if assessee adopted TNMM has most appropriate method on entity level, but there is no restriction under the Act to separately benchmark royalty payment if comparables are available. In this case, the AO has given various reasons to reject the TP study conducted by the assessee for benchmarking royalty payment and thus rejected the arguments of the assessee. Having said so, let us come back to the comparables selected by the TPO. The TPO has selected two comparables M/s Amanasu Energy Corp. & M/s Power verde Inc. According to the ld. Counsel of the assessee both are functionally similar and cannot be compared. He further submitted that in respect of M/s. Power verde Inc., the data relied upon by the TPO pertains to AY 2014- 15, whereas, the issue pertains to AY 2015-16. He further claimed that the TPO has failed to apply proper filter to select the companies. Therefore, considering the facts and circumstances of the case, we are of the considered view that this issue will go back to the file of the TPO for :-22-: IT(TP)A. No: 02/Chny/2020 fresh examination of the claim of the assessee to carryout TP analysis in respect of royalty payments. 13. Ground No. 8 to 12 Corporate Tax Adjustment: 13.1 The assessee paid PF & ESI of Rs. 5,100,766/- before filing the return u/s. 139(1) of the Act i.e., before 30.11.2015. But not before the due date as prescribed in specific Acts of ESI & PF. As per the Assessing Officer, the provisions is violated u/s. 43B of the Act in relation to Employees Contribution to PF & ESI. The Ld. DRP failed to appreciate the payments of assessee made after the due date of the specific act, but before the due date of filing return u/s. 139(1) of the Act. The matter is already covered in assessee’s own case bearing no. IT(TP)A No. 5/Chny/2018 dated 10.03.2021 for AY 2011-12 and assessee also submitted the follwing judgments which are as follows:- (i) M/s. Doosan Power Systems India Private Limited (ITA No. IT(TP)A. No. 5/Chny/2018) (ii) M/s. CIT vs Industrial Security & Intelligence India P Ltd (TCA No. 585, 586/2015 dated 24.07.2015 Madras HC) (iii) DCIT vs Washwin Automotive India Private Limited (ITA No. 2588/Chny/2016) (iv) CIT vs Amil Ltd (321 ITR 508 Del. HC) (vi) CIT vs Alom Extrusions Ltd (319 ITR 306 SC) (vii) CIT vs Vinay Cement Ltd (213 CTR 268 SC) :-23-: IT(TP)A. No: 02/Chny/2020 13.2 The matter is already covered by the coordinate bench. So, the addition made of Rs. 5,100,766/- is deleted and accordingly ground nos. 8 to 12 are allowed. 14. Ground No. 13 to 17: 14.1 In all the consequential grounds, the counsel of the assessee has not pressed the same. So, all the grounds are remained as not pressed. 15. In the result, the appeal of the assessee is allowed under statistical purpose. Order pronounced in the court on 17 th March, 2022 at Chennai. Sd/- (जी. मंजुनाथ) (G. MANJUNATHA) लेखासदèय/Accountant Member Sd/- (अǓनकेश बनजȸ) (ANIKESH BANERJEE) ÛयाǓयकसदèय/Judicial Member चे᳖ई/Chennai, ᳰदनांक/Dated, the 17 th March, 2022 JPV आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3. आयकर आयुƅ (अपील)/CIT(A) 4. आयकर आयुƅ/CIT 5. िवभागीय Ůितिनिध/DR 6. गाडŊ फाईल/GF